WA Case Notes

INTRODUCTION

In Re RCR Tomlinson Ltd (administrators appointed) and Ors [2020] NSWSC 735, Justice Black of the Supreme Court of New South Wales, gave directions as to the classification of certain RCR assets as circulating or non-circulating and the date on which that classification is to be made. Those directions were of practical significance given the likely shortfall in RCR assets available to pay priority employee entitlements. They effectively determined the priorities in the distribution of funds in the RCR insolvency between employees with priority entitlements (or at least the Commonwealth standing in their place) and secured creditors.

BACKGROUND

The liquidators of RCR Tomlinson Ltd (in liq) and several other companies (RCR) sought directions under s 90-15 of the Insolvency Practice Schedule (Corporations) on issues arising in the RCR liquidation. The security trustee for a syndicate of secured creditors (Lenders) and the Commonwealth were each heard as interested parties. The critical question was whether certain property of RCR was subject to a circulating security interest for the purposes of s 561 of the Corporations Act (Act). An analysis of the nature of a circulating security interest required consideration of a cascade of defined terms in the Act and Personal Property Securities Act 2009 (Cth) (PPSA). A ‘circulating security interest’ is defined in s 51C of the Act, relevantly for the purposes of this case, by reference to a ‘circulating asset’. ‘Circulating asset’ is defined in s 340 of the PPSA, relevantly, by reference to an ‘account’. ‘Account’ is defined in s 10 of the PPSA, relevantly, to mean a “monetary obligation (whether or not earned by performance) that arises from disposing of property or granting a right or providing services in the ordinary course of a business of granting rights or providing services of that kind.’ Accordingly, the meaning of ‘monetary obligation’ in this case was central to the analysis of a ‘circulating security interest’ and therefore to the scope of s 561 of the Act and the recovery by lenders and employees. The liquidators sought directions on: (a) the relevant point in time for determining if an asset is a circulating asset; and (b) whether a right to payment under various contractual arrangements is a circulating asset.

TIMING ISSUE

It was common ground that section 561 of the Act is silent as to the relevant date for determining whether an asset is a circulating asset. This issue was of practical significance because certain assets that were not circulating assets at the date of appointing administrators to RCR (Appointment Date) had subsequently been realised with the proceeds being held as cash such that they could then be characterised as circulating assets after the Appointment Date. Black J considered that whether assets were circulating was to be determined at the ‘relevant date’, being the date on which the winding-up was taken to have begun under Pt 5.6 of the Act. In this case, it was the Appointment Date. Black J reasoned that to find otherwise would provide a strong incentive for secured creditors to seek to remove assets from the control of an administrator/liquidator as soon as possible after their appointment to prevent the conversion of those assets to cash and thereby avert the risk that they would become property subject to circulating security interests within s 561 of the Act.

SURPLUS PROCEEDS ISSUE

In the course of its business, RCR procured performance bonds for its customers as security for its contractual obligations. If one of those bonds was called and the customer received payment in excess of the amount it was entitled to receive, it would be obliged to remit that surplus to RCR. The issue before Justice Black was if, before the Appointment Date, RCR defaulted but the customer did not call on the bonds until after the Appointment Date and after receiving payment remitted the surplus to RCR, would those surplus proceeds (Surplus Proceeds) comprise circulating assets? Black J determined that the Surplus Proceeds were not circulating assets for various reasons including the following. First, the Surplus Proceeds were not personal property and so did not fall within the meaning of ‘circulating asset’ under s 340 of the PPSA and could not therefore be subject to a circulating security interest for the purposes of s 561 of the Act. That was because any right to the Surplus Proceeds was so contingent at the Appointment Date that it was “nothing but an expectancy” and not an existing right. Secondly, even if the Surplus Proceeds constituted personal property for the purposes of the PPSA, that they did not comprise an ‘account’ within the meaning of s 10 of the PPSA. Black J considered that a potential claim which may or may not arise depending on the actions of a third party had no element of ‘obligation’ about it (which was a component of the definition of ‘account’ in s 10 of the PPSA). Black J also gave weight to the decision of the Court of Appeal of New Zealand in Strategic Finance (in liq) v Bridgman [2013] NZCA 357 who analysed the concept of ‘monetary obligation’ as it appeared in the definition of ‘account receivable’ in substantially equivalent legislation. The Court observed that a monetary obligation “means an existing obligation imposed on, or assumed by, one party to pay a certain amount of money to the other party on a specific or ascertainable date” and that such an obligation will include debts but does not include “a possible liability to pay an unidentifiable sum at an unascertainable future date.” Black J held that the Surplus Proceeds did not satisfy any of those requirements for a ‘monetary obligation’ since they did not constitute an existing legal obligation at the Appointment Date to pay an identifiable monetary sum on an ascertainable date.

SUBCONTRACTOR PROCEEDS ISSUE

In the course of its business, RCR engaged subcontractors. Those subcontractors provided performance bonds to RCR to secure their contractual obligations. The issue before Black J was if, before the Appointment Date, a subcontractor defaulted under a contract with RCR such that RCR had a right to make a call on the bonds but only called on them after the Appointment Date, would the proceeds (after calling on the bonds) (Subcontractor Proceeds) comprise circulating assets? Black J considered that a potential claim in respect of the Subcontractor Proceeds would not fall within the term ‘monetary obligation’ or the term ‘account’ in ss 10 and 340(5) of the PPSA because it had no element of obligation about it at the Appointment Date. Black J observed that an unexercised right to require payment of money is not the same as the right to receive payment of money, and following the Strategic Finance decision, the claim to Subcontractor Proceeds did not satisfy the requirements for a monetary obligation since there was no existing legal obligation at the Appointment date to pay an identifiable sum.

WIP ISSUE

A final issue arose as to which types of works in progress (WIP) would comprise circulating assets available to pay priority employee entitlements. The first permutation considered was where goods or services under a contract are completed before the Appointment Date but where the issuing of an invoice occurs after the Appointment Date. Black J held that such amounts were monetary obligations and an ‘account’ within ss 10 and 340(5) of the PPSA and therefore a circulating asset within s 340 of the PPSA to which s 561 of the Act could apply. This was because the definition of ‘account’ in s 10 of the PPSA included monetary obligations “whether or not earned by performance” which suggested that it would at least include amounts that had been earned by performance that were yet to be invoiced. Further, Black J observed that any disputes as to amounts to be invoiced could be determined by the relevant pre-Appointment Date contracts. The second permutation was where goods or services under a contract were completed before the Appointment Date but where the payment was subject to certification and issuance of an invoice, both of which occurred after the Appointment Date. Black J considered that these amounts should be treated in the same way as the first permutation since any dispute as to certification and the amount invoiced could be determined under the relevant contract. The third permutation was where goods or services under a contract had only been partly performed before the Appointment Date and completed after the Appointment Date and there was no contractual right to payment until after completion. Black J observed that these were not circulating assets. As there was no contractual basis for an apportionment of WIP, there was no monetary obligation in respect of any amount in this category at the Appointment Date. Further, any works performed after the Appointment Date would not have been in the ordinary course of business (having been conducted by administrators or liquidators) and so did not fall within the meaning of ‘account’ under s 10(b) of the PPSA. This decision provides considerable guidance as to the characterisation of certain assets as circulating or non-circulating assets and implications for recoveries and priorities in the distribution of assets of an insolvent company. Procedurally, the case also shows the utility of the directions procedure in insolvency matters for resolving complex disputes as to priority among creditors.

Dr Rebecca Collins Barrister, Quayside Chambers D +61 8 9460 5256 M 0420 295 794 rcollins@quaysidechambers.com

Level 36 Exchange Tower, 2 The Esplanade Perth WA 6000 quaysidechambers.com. End notes

1 As stated at [14] of the judgment; “The case law has recognised that the object of predecessors of this section was to limit the proprietary rights of a secured creditor holding a floating charge, so that preferential debts were paid out of the property subject to the floating charge, to the extent that non-charged assets were insufficient to meet those debts”. 2 ‘Surplus Proceeds’ is defined at [3] of the judgment. 3 Strategic Finance (in liq) v Bridgman [2013] NZCA 357, [54]-[55], [57]. 4 ‘Subcontractor Proceeds’ is defined at [5] of the judgment.